Why Japan's factories won't be going home

Hopeful local media reports and a weaker yen are raising hopes that Japanese companies will move their factories back home, but we're unlikely to see an increase in 'made in Japan' labels anytime soon, analysts say.

"While the speed of offshoring may slow somewhat if the yen depreciates further, offshoring cannot be stopped, barring a long-term change in the Japanese economy's declining presence in the global economy," Goldman Sachs said in an April 2 report.

A steady trickle of media reports about companies such as consumer electronics conglomerate Panasonic and air conditioner maker Daikin moving some production back to Japan has captured the local media's imagination in a country that remains nostalgically attached to its bygone manufacturing heydays.

But "many companies remain committed to the model of local production for local consumption, and while the pace of moving production offshore may slow down, it is unlikely to be reversed," Nomura said in a report on March 31.

Going to the customers

Japan Inc has been moving its factories overseas since the 1980s and the trend has been accelerating.

In the late 1980s, less than 5 percent of Japanese companies made their products overseas, according to Nomura's calculations based on the Cabinet Office's annual corporate behavior surveys.

But the proportion of manufacturing companies that have overseas production facilities had risen to 21.6 percent by fiscal 2013 and is projected to rise to 25.5 percent by fiscal 2018, according to the Cabinet Office's survey of 867 companies listed on the Tokyo and Nagoya Stock Exchanges.

And, while Japanese media has cited the weaker yen as one of the principal reasons why companies might move production back home, the Cabinet Office survey results suggest otherwise.

Just over 50 percent of manufacturers surveyed said they moved production overseas to meet existing or growing demand in the local market.

And growth is something Japan's aging and shrinking population cannot offer, analysts said.

"The general consensus among Japanese companies is that the potential growth rate of Japan's economy is in moderate decline and growth will remain weak over the medium and long term due to a lower birth rate, aging population, and other structural factors," Goldman Sachs said in the note.

The companies surveyed by the Cabinet Office expect the Japanese economy to grow by 1.3 percent in fiscal 2014.

No going back

Japan's purchasing power has been declining steadily for more than 20 years.

After peaking at roughly 9 percent in 1991, the Japanese economy's share of nominal gross domestic product had halved to around 4.5 percent in 2014 on a purchasing power parity dollar basis, according to Goldman.

If anything, a weaker yen may only encourage another round of wasteful investment, some analysts said.

The yen is merely now back at the same level it was in the early 2000s when "exporters, particularly the electronics sector, actively invested in assembly lines that turned out to be unprofitable," said BNP Paribas chief economist Ryutaro Kono in a note on Monday.

"The danger is [moving production back to Japan will not only] reverse the correction of stock oversupply that had plagued the electronics industry for years, but also mean they will adopt a business model that is only viable at super cheap yen exchange rates last seen in early 1973," he said.

In January 1973, the yen was trading at just over 300 yen to the dollar. The yen is quoted at 119.60 to the dollar in early Asian trading on Tuesday.